Stocks Smacked As Debt Debate Continues

Friday, July 29, 2011
Stock Market Commentary:

Stocks ended lower this week as investors digested a slew of weaker-than-expected economic and earnings data and the debt stalemate continued in D.C.. It was disconcerting to see all the major averages slice and close below their respective 50 DMA lines in the final week of July which suggests the bears are getting stronger. Looking forward, the next level of support are the 2011 lows/the 200 DMA lines and the next level of resistance are the 2011 highs.

Monday-Wednesday- Stocks Smacked As Debt Deadline Approaches:

On Monday, stocks opened lower due to the ongoing debt saga in Washington D.C. However, the bulls showed up and quelled the bearish pressure after Republicans and Democrats prepared separate plans to raise the debt limit before the August 2, 2011 deadline. Moody’s, the popular rating agency, cut Greece’s debt rating further into junk territory which added to the downward pressure in equity markets across much of the developed world. As the political drama continues to unfold, a slew of companies are released their Q2 results this week. So far, over +80% of the S&P 500 companies that reported earnings topped estimates which bodes well for the ongoing economic recovery. Here is a short list of some of the high ranked/high profile companies that released their Q2 results in the final week of July: BIDU, AMZN, NFLX, GMCR, WFM, ACOM, POT, DECK, JAZZ, CRR, CLF, SRCL, BIIB, & TNAV. As always, in addition to analyzing the actual numbers we tend to focus on how a company (and the market) reacts to data.

On Tuesday, investors digested a slew of mixed earnings and economic data and continued to wait for a solution to the debt problem in D.C. Data on the Economic front was mixed to slightly positive. The S&P Case-Shiller index of U.S. home prices rose in May.  This was received well by the market and was the second consecutive monthly gain for domestic home prices. Meanwhile, a separate report showed that new-home sales slid -1% in June to an annual rate of 312,000. Economists like to see an average annual rate near 750,000 to be considered healthy. Finally, U.S. consumer confidence rose in July which bodes well for the economic recovery. The Conference Board said its index hit 59.5 in July which topped analyst estimates.

Stocks opened lower on Wednesday as the debt stalemate continued in D.C. and investors digested the latest round of tepid economic and mixed earnings data. On the economic front, durable goods orders slid -2.1% in June which was much lower than the Street’s forecast for a gain of +0.4%. A separate report from the Federal Reserve Bank of Chicago said manufacturing output in the Midwest region was weaker in June which does not bode well for the ongoing economic recovery. The Fed’s Beige Book showed that economic growth was moving forward at a very slow rate. Elsewhere, the political stalemate continued in D.C. which led many to question whether or not the U.S.’ AAA credit rating may be cut by one of the popular rating agencies. Moreover, investors are concerned what the ramifications of such a cut would mean for the global financial system.

Thursday-Friday’s Action: Stocks Smacked As Debt Stalemate Continues

Before Thursday’s open, the Labor Department said jobless claims fell by a seasonally adjusted -24,000 to 398,000 last week.  It was somewhat encouraging to see claims fall below –400,000 for the first time since April 2. In case you do not know, most economists view 400,000 as the dividing line between job growth and job contraction. So it will be interesting to see if this is a one off or the beginning of a new trend (stronger job growth). Earnings news was mixed, Crocs Inc. (CROX), Skechers USA (SKX), and Green Mountain Coffee (GMCR) all rallied while Exxon Mobil (XOM) and Akamai Technologies (AKAM) fell after releasing their Q2 results. After Thursday’s close, the House delayed a key vote to back Speaker Boehner’s latest plan which sent futures lower overnight. Stocks opened sharply lower after the government said Q2 GDP only rose +1.3% which fell short of the +1.8% forecast. It was also disconcerting to see first quarter’s GDP lowered to +0.4% from +1.9%.

Market Outlook- Market In A Correction

The latest action in the major averages suggests the market is back in a correction as all the major averages are flirting with their respective 200 DMA lines.  Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. That said, the recent action suggests caution is paramount at this stage until all the major averages rally back towards their respective 2011 highs. If you are looking for specific help navigating this market, please contact us for more information.

 

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